Aspects of the X-Efficiency Theory of the Firm

The model explains the phenomenon of X-efficiency, and presents some microeconomic propositions based on new foundations that go beyond the economic man postulate. It postulates behavior based on a compromise between internal standards and unconstrained desires. The analysis emphasizes: (1) the individual, not the firm, as the basic decision unit; (2) the notion of effort as the basic variable; and (3) the determination of costs as a result of interconnected individual effort decisions, not by simultaneous price, technique, and quantity decisions by some "supermanager." Firm members are presumed to have discretion and hence to interpret their jobs. Inert behavioral areas, entropy, and the motivational interpretation of signals are basic elements of the model. One result is that firms do not minimize costs, and this may hold even under competition.